Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon everyone and welcome to TSMC's fourth quarter 2025 earnings conference and conference call. My name is Jeff Su, TSMC's director of investor relations and your host for today. Today's event is being webcast live through TSMC's website at www.tsmc.com where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the fourth quarter, 2025, followed by our guidance for the first quarter, 2026. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. Cici Wei, will jointly provide the company's key messages. Then we will open both the floor and the line for the question and answer session. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which would cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the microphone over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter of 2025 and a recap of full year 2025. After that, I will provide the guidance for the first quarter of 2026. Fourth quarter revenue increased 5.7% sequentially in NT, supported by strong demand for our leading edge process technologies. In U.S. dollar term, revenue increased 1.9% sequentially to $33.7 billion, slightly ahead of our fourth quarter guidance. Gross margin increased by 2.8 percentage points sequentially to 62.3%, primarily due to cost improvement efforts, favorable foreign exchange rate. and the high capacity utilization rate. The operating expenses accounted for 8.4% of net revenue compared to 8.9% in third quarter of 25 due to operating leverage. Thus, operating margin increased sequentially Overall, our fourth quarter EPS was 19.5 NT and ROE was 38.8%. Now let's move on to revenue by technology. Three nanometer process technology contributed 28% of wafer revenue in the fourth quarter, while five nanometer and seven nanometer accounted for 35% and 14% respectively. Advanced technologies, defined as 7 nanometer and below, accounted for 77% of wafer revenue. On a full year basis, 3 nanometer revenue contribution came in at 24% of 2025 wafer revenue. 5 nanometer 36% and 7 nanometer 14%. Advanced technologies accounted for 74% of total welfare revenue up from 69% in 2024. Moving on to revenue contribution by platform. HPC increased 4% quarter over quarter to account for 55% of our fourth quarter revenue. Smartphone increased 11% to account for 32%. IoT increased 3% to account for 5%. Automotive decreased 1% to account for 5%. While DCE decreased 22% to account for 1%. On a four-year basis, HPC increased 48% year over year. Smartphone, IoT, and automotive increased by 11%, 15%, and 34% respectively in 2025, while DCE remains flat. Overall, HPC accounted for 58% of our 2025 revenue. Smartphone accounted for 29%. IoT accounted for 5%. Automotive accounted for 5%. and DCE accounted for 1%. Moving on to the balance sheet, we ended the fourth quarter with cash and marketable securities of 3.1 trillion NT or 98 billion US dollars. On the liability side, current liabilities increased by 182 billion NT quarter over quarter mainly due to the increase of $95 billion in accrued liabilities and others, and the increase of $61 billion from the reclassification of bonds payable to current portion. In terms of financial ratios, accounts receivable days increased by one day to 26 days. Inventory days remain steady at 74 days. Regarding cash flow and CAPEX, during the fourth quarter, we generated about $726 billion NT in cash from operations, spent $357 billion in CAPEX, and distributed $130 billion for first quarter 25 cash dividends. Overall, our cash balance increased 297 billion NT to 2.8 trillion at the end of the quarter. In US dollar terms, our fourth quarter capital expenditures total 11.5 billion. Now let's look at the recap of our performance in 2025. Thanks to the strong demand for our leading edge process technologies, We continue to outperform the foundry industry in 2025. Our revenue increased 35.9% in U.S. dollar terms to 122 billion, or increased 31.6% in NT dollar terms to 3.8 trillion. Gross margin increased 3.8 percentage points to 59.9%, mainly reflecting a higher capacity utilization rate and cost improvement efforts, partially offset by an unfavorable foreign exchange rate and margin dilution from our overseas FABs. With operating leverage, our operating margin increased 5.1 percentage point to 50.8%. Overall, full year EPS increased 46.4% to 66.25 NT and ROE increased 5.1 percentage point to 35.4%. In 2025, we generated 2.3 trillion NT in operating cash flow, spend 1.3 trillion NT or 40.9 billion US dollars on capital expenditures. As a result, free cash flow amounted to 1 trillion NT, up 15.2% from 2024. Meanwhile, we paid 467 billion NT in cash dividends in 2025, up 28.6% year over year, as we continue to increase our cash dividend per share. TSMC shareholders receive a total of 18 NT cash dividend per share in 2025, up from 14 NT in 2024, and they will receive at least 23 NT per share in 2026. I finished my financial summary. Now let's turn to our current quarter guidance. We expect our business to be supported by continuous strong demand for our leading-edge process technologies. Based on the current business outlook, we expect our first quarter revenue to be between $34.6 billion and $35.8 billion U.S. dollars, which represents a 4% sequential increase or a 38% year-over increase at the midpoint. Based on the exchange rate assumption of 1%, 31.6 NT. Gross margin is expected to be between 63 and 65%. Operating margin between 54 and 56%. Lastly, our effective tax rate was 16% in 2025. For 2026, we expect our effective tax rate to be between 17 and 18%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by talking about our fourth quarter 25 and first quarter 26 profitability. Compared to third quarter, our fourth quarter gross margin increased by 280 basis points sequentially to 62.3%, primarily due to cost improvement efforts, a more favorable foreign exchange rate. and a higher overall capacity utilization rate. Compared to our fourth quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 130 basis points, mainly as we delivered better than expected cost improvement efforts. In addition, The actual fourth quarter exchange rate was $1 to 31.01 NT as compared to our guidance of $1 to 30.6 NT. We have just guided our first quarter gross margin to increase by 170 basis points to 64% at the midpoint. primarily driven by continued cost improvement efforts, including productivity gains and the higher overall capacity utilization rate, partially offset by continued dilution from our overseas FAB. Looking at full year 2026, given the six factors, there are a few puts and takes I would like to share. On the one hand, we expect our overall utilization rate to moderately increase in 2026. And free gross margin is expected to cross over to the corporate average sometime in 2026. And we continue to work hard to earn our value. In addition, We are leveraging our manufacturing excellence to drive greater productivity in our fabs to generate more wafer output. We are also increasing across no capacity optimization, which includes flexible capacity support among N7, N5, and N3 nodes to support our profitability. On the other hand, as the scale of our overseas expansion grows, we continue to forecast the gross margin dilution from the ramp up of overseas FAFSA in the next several years to be between 2 to 3% in the early stages and widened to 3 to 4% in the latter stages. Furthermore, The initial ramp up of our two nanometer technology will start to dilute our gross margin in the second half of the year, and we expect between two to three percent dilution for the full year of 2026. Finally, we have no control over the foreign exchange rate, but that may be another factor in 2026. Next, let me talk about our 2026 capital budget and depreciation. At TSNC, a higher level of capital expenditures is always correlated to the high growth opportunities in the following years. With our strong technology leadership and differentiation, we are well positioned to capture the multi-year structure demand from the industry megatrends of 5G, AI, and HPC. In 2025, we spend 40.9 billion US dollars as compared to 29.8 billion in 2024, as we begin to raise our level of capital spending in anticipation of the growth that will follow in the future years. In 2026, we expect our capital budget to be between 52 billion and 56 billion US dollars as we continue to invest to support our customers' growth. About 70 to 80% of the 2026 capital budget will be allocated to advanced process technologies. About 10% will be spent for specialty technologies and about 10 to 20% will be spent for advanced packaging, testing, mask making and others. Our depreciation expense is expected to increase by high teens percentage year over year in 2026. Mainly as we ramp our two nanometer technologies. Even as we invest in the future growth with this level of CAPAC spending in 2026, we remain committed to delivering profitable growth to our shareholders. Finally, let me talk about TSMC's long-term profitability outlook. As a foundry, our biggest responsibility is to support our customers' growth, and we always view them as partners. Having said that, we are in a very capital-intensive business. In the last five years alone, our CAPEX totaled $167 billion. Therefore, it is important for TSNC to earn a sustainable and healthy return as we continue to invest in leading-edge specialty and advanced packaging technologies to support our customers' growth. Today, we face increasing manufacturing cost challenges due to the rising cost of leading For example, the cost of tools are becoming more expensive and process complexity is increasing. As a result, the CAPEX dollar required to build 1K wafer per month capacity of N2 is substantially higher than 1K wafer per month capacity for N3. The CAPEX per day cost for A14 will be even higher. We also face additional cost challenges from expansion of our global manufacturing footprint, new investments in specialty technologies, and inflationary costs. These all lead to a higher level of capex standing. As a result, in the last three years, our capex dollars amount total 101 billion US dollars, but is expected to be significantly higher in the next three years. Having said that, we continue to work closely with our customers to plan our capacity while sticking to our disciplines to ensure a healthy overall capacity utilization rate through the cycle. Our pricing will remain strategic, not opportunistic to earn our value. We will work diligently with our suppliers to drive greater cost improvements. We will also leverage our manufacturing excellence to generate more wafer output and drive greater across-node capacity optimization in our fab operations to support our profitability. By taking such actions, we believe a long-term growth margin of 56% and higher through the cycle is achievable, and we can earn an ROE of high 20% through the cycle. By earning a sustainable and healthy return, even as we shoulder a greater burden of CAPEX investment for our customers, we can continue to invest in technology and capacity to support their growth while delivering long-term profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividends per share on both an annual and quarterly basis. Now, let me turn the microphone over to CC.

Thank you, Wendell. Good afternoon, everybody. First, let me start with our 2026 outlook. In 2025, we observe robust AI-related demand throughout the whole year, where non-AI end-market segment patternality and so admire the recovery. Concluding 2025, biologic wafer manufacturing, packaging, testing, master making, and others increased 16% year-over-year. Supported by our strong technology differentiation and broad customer base, TSMC's revenue increased 35.9% year-over-year in U.S. dollar terms, outperforming the $132 industry growth. Then during 2026, we understand there are uncertainties and risks from the potential impact of tariff policies and rising component prices, especially in consumer-related and price-sensitive market segment. As such, we will be prudent in our business planning while focusing on the fundamentals of our business to further strengthen our competition position. We forecast the 2020 industry to grow 14% year-over-year in 2026, supported by robust AI-related demand. Underpinned by strong demand for our leading edge specialty, and advanced packaging technologies, we are confident we can continue to outperform the industry growth. We expect 2026 to be another strong growth year for TSMC and forecast our four-year revenue to increase by close to 30% in U.S. dollar terms. Next, let me talk about AI demand and TSMC's long-term growth outlook. Recent development in the AI market continues to be very positive. Revenue from AI accelerator accounted for high teens percent of our total revenue in 2025. Looking ahead, We observe increasing AI model adoption across consumer, enterprise, and sovereign AI segment. This is driving need for more and more computation, which supports the robust demand for leading-edge silicon. Our customers continue to provide us with their positive outlook. In addition, our customers are customers. who are mainly the cloud service providers, are also providing strong signals and reaching out directly to request the capacity to support their business. Thus, our conviction in the multi-year AI megatrend remains strong, and we believe the demand for semiconductor will continue to be very fundamental. As a foundry, our first responsibility is to fully support our customer with the most advanced technology and necessary capacity to unleash their innovations. To address the structural increase in the long-term market demand profile, TSMC works closely with our customer and our customers' customers to plan our capacity. This process is continuous and ongoing. In addition, as process technology complexity increases, the engagement time with customers is now at least two to three years in advance. Internally, as we have said before, TSMC employs a disciplined capacity planning system to assess the market demand from both top-down and bottom-up approaches. We focus on the overall addressable megatrend to determine the appropriate capacity to build. Based on our assessment, we are preparing to increase our capacity and stepping out our capex investment to support our customers' future growth. We are also to the extent possible, both in Taiwan and in Arizona. We are also leveraging our manufacturing excellence to drive greater productivity in our fabs, to generate more output, convert N5 capacity to support N3 wherever necessary, and focus on capacity optimization across node. to maximize the support to our customers. Based on our planning framework, we raise our forecast for the revenue growth from AI Accelerator to approach a mid to high 50% taker for the five years period from 2024 to 2029. Underpinned by our technology proficiency and broad customer base, we now expect our overall long-term revenue growth to approach 25% CAGR in U.S. dollar terms for the five-year period starting from 2024. While we expect AI accelerators to be the largest contributor in terms of our incremental revenue growth. Our overall revenue growth will be fueled by all four of our growth platforms, which are smartphone, HPC, IoT, and automotive in the next several years. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading edge specialty and advanced packaging technologies to support your growth. We will also remain disciplined in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now let me talk about the TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' needs. As they value some geographic flexibility and a necessary level of government support, this is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state, and city and executing well to our plan. Our first flat has already successfully entered high-volume production in 4Q24. Construction of our second flat is already complete and tour moving and installation is planned in 2026. and now expect to enter high-volume manufacturing in the second half of 2027. Construction of our third fair has already started, and we are in the process of applying for permits to begin the construction of our fourth fair, and fourth advanced packaging fair. Furthermore, We have just completed the purchase of a second large piece of land nearby to support our current expansion plan and provide more flexibility in response to the very strong multi-year AI-related demand. Our plan will enable TSMC to scale up an independent gigafair cluster in Arizona to support the needs of our leading-edge customers AI, and HPC applications. Next, in Japan, thanks to the strong support from the Japan Central Prefecture and the local government, our first specialty fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fab has started and the technologies and ramp schedule will be based on our customers' need and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal, state, and city governments. Construction of our specialty plant in Dresden, Germany is progressing in our plan The REM schedule will be based on our customers' need and market conditions. In Taiwan, with support from Taiwan government, we are preparing multiple phase of two nanometers of fat in both Hsinchu and Kaohsiung Science Park. We will continue to invest in leading edge and advanced packaging facilities in Taiwan over the next few years. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be better to be the trusted technology and capacity provider of the global logic industry for year to come. Last, let me talk about N2 and A16 status. Our 2 nanometer and S16 technologies lead the industry in addressing the incessant demand for energy efficient computing and almost all the innovators are working with TSMC. And to successfully enter high volume manufacturing in 4Q 2025 at both our Hsinchu and Kaohsiung sites with good yield. We are seeing strong demand from smartphone and HPC AI applications and expect a fast ramp in 2026. With our strategy of continuous enhancement, we also introduced N2P as an extension of N2 family. N2P features further performance and power benefit. on top of N2 and volume production is scheduled for the second half of this year. We also introduced A16 featuring our best-in-class super power rail or SPR. A16 is best suitable for specific HPC products with complex signal route and the dense power delivery network. Volume production is on track. for second half 2026. We believe N2, N2P, A16 and its derivatives will prepare our N2 family to be another large and long lasting node for TSMC while further extending our technology leadership position well into the future. This concludes our team message and thank you for your attention.